1. Field of the Invention
This invention relates to a method of funding and delivering retirement benefits promised as part of a defined benefit pension plan, such method of funding and delivering benefits having inherent advantages which help reduce the cost to the plan sponsor and reduce the risk of failure of the plan itself.
2. Background of the Invention
Defined Benefit Pension Plans (which will be referred to hereafter as “DB plans”) have traditionally played a vital role in providing retirement income for many senior citizens. These plans typically pay a regular income stream, or pension, to employees after they had worked for one company for many years, sometimes decades. The amount of the payments are usually determined based on the number of years of service by the employees, as well as their average income during the final years of their employment.
In recent years these plans have been falling out of favor with employers because of the high cost of providing the retirement benefits associated with them. The high cost is further exacerbated by the fact there is a lot of uncertainty as to what the total cost of providing the benefits ultimately will be, in part because investment results will directly impact the amount of funds required to provide the promised benefits. Defined contribution plans have offered employers an alternative to DB plans, with a very predictable cost to the employer. However, this remedy compromises the benefits provided to retirees by eliminating a guaranteed level of income that is predictable prior to retirement.
Therefore, it seems the ideal remedy is an alternative retirement income system which preserves the defined benefit feature, but which is inherently less costly and problematic to fund. The proposed invention described herein, PENSION ALTERNATIVE RETIREMENT INCOME SYSTEM, (which will be referred to hereafter as “PARIS”) is one which has such characteristics.
3. Objects and Advantages
PARIS described herein addresses the uncertain and sometimes prohibitive cost of providing defined benefits within a defined benefit pension plan by utilizing life insurance policies, split dollar life insurance, and collateralized loans in a new and creative way. PARIS will utilize these vehicles in such a way as to take advantage of the flexible nature of universal life insurance and split dollar arrangements, while pre-existing tax laws which will help to minimize the after tax cost of providing the promised benefits. It will do this by shifting the burden of providing benefits to multiple third parties who can each provide one component of the overall solution, and do it in such a way that the taxes applicable to the entire group of benefit providers is favorable. PARIS will also add value by effectively allowing the DB plan to lever up by borrowing at one rate via banks and reinvest at higher rates via insurance policies, something it would not ordinarily be able to do. Finally, by shifting the funding burden to other highly rated third parties, the plan sponsor can reduce the risk of failing to deliver the promised benefits to its plan participants.